DFS Corporation is currently an? all-equity firm, with assets with a market value of $ 177 million and 4 million shares outstanding. DFS is considering a leveraged recapitalization to boost its share price. The firm plans to raise a fixed amount of permanent debt? (i.e., the outstanding principal will remain? constant) and use the proceeds to repurchase shares. DFS pays a 34 % corporate tax? rate, so one motivation for taking on the debt is to reduce the? firm's tax liability.? However, the upfront investment banking fees associated with the recapitalization will be 4 %of the amount of debt raised. Adding leverage will also create the possibility of future financial distress or agency? costs; shown in the table? here,
Debt amount ($ million) 0 10 20 30 40 50
Present value of expected distress and agency costs ($ million) 0.0 -0.81 -1.93 -3.77 -8.32 -12.51
are? DFS's estimates for different levels of debt.
a. Based on this? information, which level of debt is the best choice for? DFS?
b. Estimate the stock price once this transaction is announced